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Occupancy Rate

Guide to Understanding the Occupancy Rate Concept

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Occupancy Rate

How to Calculate Occupancy Rate

The occupancy rate measures the number of occupied rental units at a specific point in time relative to the total number of rental units available.

In particular, the occupancy rate is a key performance indicator (KPI) within the hospitality sector, namely hotels, since the metric quantifies the proportion of a rental property that is actually being utilized.

Common examples of industries wherein occupancy is an important determinant of revenue are as follows.

  • Hotels
  • Apartment Complex
  • Hospitals
  • Healthcare Assisted Living Facilities
  • C2C Rental Platform (i.e. Airbnb)

Since an unoccupied rental unit such as a hotel room generates no revenue, a hotel strives to achieve as high of occupancy as possible.

The closer that a hotel’s occupancy is near 100% — i.e. the full utilization of all available rental units — the closer the hotel is to reaching its full revenue capacity, all else being equal.

But higher occupancy does not necessarily always translate into higher revenue because other factors such as the average daily rate (ADR) and the revenue per available room must also be considered.

For instance, a hotel with 85% occupancy could bring in more revenue than a competitor with 100% occupancy if the former were to charge sufficiently higher pricing.

  • Higher Pricing → Lower Occupancy %
  • Lower Pricing → Higher Occupancy %

Simply put, a hotel with above-market pricing will have a business model that reduces its reliance on near-full capacity occupancy to reach its target revenue.

In order to maximize revenue generation, the trade-off between pricing and occupancy must be understood by hotel owners and renters when setting prices.

Occupancy Rate Formula

The formula for calculating the occupancy at a hotel is as follows.

Formula
  • Occupancy Rate = Number of Occupied Rooms ÷ Total Number of Available Rooms

For example, if a hotel with 100 available rooms currently has 85 rooms booked, the occupancy is 85% on the given day.

  • Occupancy = 85 ÷ 100 = 0.85, or 85%
Occupancy vs. Vacancy Rate

The inverse of the occupancy rate is the vacancy rate, which is the percentage of empty, vacated rooms.

  • Vacancy Rate = 1 – Occupancy Rate

Occupancy Rate Calculator — Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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Occupancy Rate Example Calculation

Suppose a hotel has a total of 250 rooms available for customers to book.

On this particular date, the number of occupied rooms is 225, so only 25 rooms are vacant.

  • Number of Occupied Rooms = 225
  • Total Number of Available Rooms = 250

Given these assumptions, the occupancy is 90% on this specific day, which we calculated by dividing the number of occupied rooms by the total available rooms.

  • Occupancy Rate = 225 ÷ 250 = 90%

In conclusion, we can also back-solve the vacancy rate by subtracting the hotel’s occupancy from one.

  • Vacancy Rate = 1 – 90% = 10%

Occupancy Rate Calculator

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